How much of my portfolio should be in cash during retirement?

DairyQueen

stephenadarglas said:

neilnockie said:

0% should be in cash.
Saving is losing with inflation.
Invest in funds targeting a 15-20% return & you'll way outperform cash.

It's not neilnockie's turn to have the brain today I'm afraid

Suspect s/he is a troll. Isn't the first; won't be the last. They come-and-go with depressing regularity.

green_man

Audaxer said:

Deleted_User said:

Mentioned before my drawdown strategy, may not be right, but makes me sleep well
Based on number of years spending
2 years cash
Years 3-5 MyMap 3 as core and three wealth preservation ITs/funds (so roughly a 20/80 split) as satellites 
Years 6-9 60/40 split between Vanguard and HSBC Global Strategy Balanced (I don't like more than a 100k in each fund, even though these are huge companies)
Years 10+ LGGG/L&G International Index/Fidelity Index  as core and a number of equity ITs and funds (Smithson, Fundsmith, BG Discovery, Bankers,  BG Managed) as satellites 

Deleted_User, I'm interested to know if you would use your cash for spending in the first two years irrespective of what happens in the markets during these two years? If my investments performed well in these first two years, I would tend to drawdown from my investments and keep the two year cash buffer to draw on in times of poor market returns. 

Not trying to answer for Deleted_User, but in my case my assumption has always being that I would only draw from the cash buffer if the other elements (equities or whatever) were at a lower level than the previous year. Obviously there are lots of variations on at what point you actually start the cash drawdown (5% drop? 10% drop etc.)

There doesn’t seem to be A great deal of discussion on how exactly to use this type of buffer.  The latest drop was pretty easy, a large quick drop that only lasted a few weeks. But more gradual declines and longer term depressions seem somewhat more difficult to handle (except in hindsight).

[Deleted User]

green_man said:

There doesn’t seem to be A great deal of discussion on how exactly to use this type of buffer.  The latest drop was pretty easy, a large quick drop that only lasted a few weeks. But more gradual declines and longer term depressions seem somewhat more difficult to handle (except in hindsight).

Agree with green+man, there hasn't a lot of discussion on how to use the buffer
I have just bought the book "Beyond the 4% rule" by Abraham Okusanya  where there is some discussion on that, I may revisit this (and hopefully soon as I only have 85 working days until retirement)

Audaxer

Deleted_User said:

green_man said:

There doesn’t seem to be A great deal of discussion on how exactly to use this type of buffer.  The latest drop was pretty easy, a large quick drop that only lasted a few weeks. But more gradual declines and longer term depressions seem somewhat more difficult to handle (except in hindsight).

Agree with green+man, there hasn't a lot of discussion on how to use the buffer
I have just bought the book "Beyond the 4% rule" by Abraham Okusanya  where there is some discussion on that, I may revisit this (and hopefully soon as I only have 85 working days until retirement)

I agree that people will use cash buffers at different times. I was just concerned that if you decide to use up your 2 years cash in the first two years under a bucket strategy, you don't have a cash buffer left to use if the markets start falling in year 3 or later.

TBC15

Deleted_User said:

green_man said:

There doesn’t seem to be A great deal of discussion on how exactly to use this type of buffer.  The latest drop was pretty easy, a large quick drop that only lasted a few weeks. But more gradual declines and longer term depressions seem somewhat more difficult to handle (except in hindsight).

Agree with green+man, there hasn't a lot of discussion on how to use the buffer
I have just bought the book "Beyond the 4% rule" by Abraham Okusanya  where there is some discussion on that, I may revisit this (and hopefully soon as I only have 85 working days until retirement)

Could you read quickly and get back to us please.

baz8755

Given recent events I would say keep 5 years basic living expenses in cash (banks/building/societies/premium bonds, etc)
I am just over 4 years away from 55 and due to workplace uncertainty I have been keeping enough cash to see me through to 55 if needed, squirreling any surplus into my portfolio as 55 looms nearer.
At the end of last year I had a sizeable lump sum (just over 5 years living expenses worth) from a 5 year fixed ISA maturing and found the best rate was with a 1 year locked savings account, so kept 1 years living allowance in ready cash and placed the rest in there.
However during the first quarter of this year my investments were doing really well and I was kicking myself for not investing the sum, also during this period my employment fears materialised, and then COVID-19 happened.
I was actually relieved that I had a five year buffer so that I could pick when to take money out of the stock market, especially as unfortunately one of my friends had to draw down at the stock market lowest.
Luckily everything has now picked up but I expect quite a few stormy times ahead for investors and although 5 years may seen like an extreme long term view it is one that means I can sleep soundly at night.

NedS

michaels said:

neilnockie said:

0% should be in cash.
Saving is losing with inflation.
Invest in funds targeting a 15-20% return & you'll way outperform cash.

Sequence of return risk means your safe withdrawal rate based on historic market performance is higher with 20% cash 80% equities than it is with 100% cash.

My point is that a strategy to withdraw from cash rather than equities when markets are by some definition 'low' is effectively a dynamic rebalancing strategy that should recognised for what it is and formalised.  If at some market level it makes sense to hold less cash and more equities (and vice versa) then why not rebalance the whole portfolio correspondingly rather than tinkering at the edges via the drawdown?

Playing devil's advocate here, and I could have quoted many posts...

Surely in it's simplest form this is attempting to time the market? You are making a judgement call whether you think equities will rise or fall from a given point, and based on that you are making a decision whether to withdraw from cash if you think markets will rise or equities if you think markets will fall. And all the time (maybe the next 30-40 years) you have the drag of 20% of your portfolio sat in cash making a loss, being eroded by inflation. You have a 50:50 chance of being right. As we know equities rise 2/3rd's of the time, on that basis one should stay fully invested and be right 2/3rd's of the time.

So it's a fools game to try to time the market in accumulation but we are saying it's OK once we retire in decumulation?

Maybe 20% is simply far too high? If you are looking at a diversified global equity portfolio and using typical 3-4% withdrawal rates, 20% cash may be 4-5 years worth of cash, and then we have the natural yield of our portfolio which may be 2% (or higher if our portfolio is targeting income) which pushes out our cash position to 8-10 years.

With 100% equity, if one is able to limit spending to 3% withdrawal during bad years, then with a natural yield of 2%, you would only be drawing down 1% equities compared to the drag that sitting on 20% cash would cause.

83705628

NedS said:

michaels said:

neilnockie said:

0% should be in cash.
Saving is losing with inflation.
Invest in funds targeting a 15-20% return & you'll way outperform cash.

Sequence of return risk means your safe withdrawal rate based on historic market performance is higher with 20% cash 80% equities than it is with 100% cash.

My point is that a strategy to withdraw from cash rather than equities when markets are by some definition 'low' is effectively a dynamic rebalancing strategy that should recognised for what it is and formalised.  If at some market level it makes sense to hold less cash and more equities (and vice versa) then why not rebalance the whole portfolio correspondingly rather than tinkering at the edges via the drawdown?

Playing devil's advocate here, and I could have quoted many posts...

Surely in it's simplest form this is attempting to time the market? You are making a judgement call whether you think equities will rise or fall from a given point, and based on that you are making a decision whether to withdraw from cash if you think markets will rise or equities if you think markets will fall. And all the time (maybe the next 30-40 years) you have the drag of 20% of your portfolio sat in cash making a loss, being eroded by inflation. You have a 50:50 chance of being right. As we know equities rise 2/3rd's of the time, on that basis one should stay fully invested and be right 2/3rd's of the time.

So it's a fools game to try to time the market in accumulation but we are saying it's OK once we retire in decumulation?

Maybe 20% is simply far too high? If you are looking at a diversified global equity portfolio and using typical 3-4% withdrawal rates, 20% cash may be 4-5 years worth of cash, and then we have the natural yield of our portfolio which may be 2% (or higher if our portfolio is targeting income) which pushes out our cash position to 8-10 years.

With 100% equity, if one is able to limit spending to 3% withdrawal during bad years, then with a natural yield of 2%, you would only be drawing down 1% equities compared to the drag that sitting on 20% cash would cause.

/
FTSE all share yield is 4.5%, 250 is 3.9% (ish, currently or at end of June) global is 2.5%, only the US is down to below 2%. We should obviously expect cuts but the worst we've had in history for the FTAS was -11% in 2009, -14% in 1998, -33% 1929-33, -47% in 1919. The resilience is remarkable.
 You can generally count of dividends so as long as you take costs into account, dividends are your baseline sustainable withdrawal rate.

DairyQueen

NedS said:

michaels said:

neilnockie said:

0% should be in cash.
Saving is losing with inflation.
Invest in funds targeting a 15-20% return & you'll way outperform cash.

Sequence of return risk means your safe withdrawal rate based on historic market performance is higher with 20% cash 80% equities than it is with 100% cash.

My point is that a strategy to withdraw from cash rather than equities when markets are by some definition 'low' is effectively a dynamic rebalancing strategy that should recognised for what it is and formalised.  If at some market level it makes sense to hold less cash and more equities (and vice versa) then why not rebalance the whole portfolio correspondingly rather than tinkering at the edges via the drawdown?

Playing devil's advocate here, and I could have quoted many posts...

Surely in it's simplest form this is attempting to time the market? You are making a judgement call whether you think equities will rise or fall from a given point, and based on that you are making a decision whether to withdraw from cash if you think markets will rise or equities if you think markets will fall. And all the time (maybe the next 30-40 years) you have the drag of 20% of your portfolio sat in cash making a loss, being eroded by inflation. You have a 50:50 chance of being right. As we know equities rise 2/3rd's of the time, on that basis one should stay fully invested and be right 2/3rd's of the time.

So it's a fools game to try to time the market in accumulation but we are saying it's OK once we retire in decumulation?

Maybe 20% is simply far too high? If you are looking at a diversified global equity portfolio and using typical 3-4% withdrawal rates, 20% cash may be 4-5 years worth of cash, and then we have the natural yield of our portfolio which may be 2% (or higher if our portfolio is targeting income) which pushes out our cash position to 8-10 years.

With 100% equity, if one is able to limit spending to 3% withdrawal during bad years, then with a natural yield of 2%, you would only be drawing down 1% equities compared to the drag that sitting on 20% cash would cause.

Check out the vast majority of drawdown strategies. Many use algorithms that assume withdrawal/rebalance regardless of the state of the current market. They work on the premise that retirees need to draw income regardless, and they use specific rules to determine the order in which available portfolio assets are taken (cash, then bonds, then equities). Drawdown is taken and the portfolio rebalanced back to the selected asset allocation. Strategies use rules (for example) to determine when drawdown should be suspended (and a cash buffer used) and/or when inflation-increases should be foregone. 

Sequence of returns dictate safe withdrawal rates and these are the drivers for managing a portfolio in retirement. Deaccumulation requires a very different approach than accumulation.

craig1912

I’m in drawdown and have been for 18 months. Nothing in cash. I did discuss with my IFA and it remains an option I guess but am comfortable in the long term that it will be the right strategy. It does almost boil down to trying to time the markets and that has never been a great idea